Debt-to-Equity Swap in Poland

A debt-to-equity swap in Poland is a restructuring mechanism that converts outstanding creditor claims into equity in the debtor company, allowing the business to continue operating while reducing its debt burden. Polish law provides a clear, if demanding, procedural framework for executing this conversion within both restructuring and bankruptcy proceedings. For creditors, the swap offers a path to recovery that preserves enterprise value; for debtors, it can mean the difference between survival and liquidation. This guide covers the legal basis, eligible proceedings, procedural steps, tax and corporate consequences, and the practical considerations that determine whether a swap succeeds or fails in the Polish market.

A debt-to-equity swap is a transaction in which a creditor agrees to extinguish, in whole or in part, a monetary claim against a company in exchange for newly issued shares or other equity instruments in that company. The creditor moves from the position of a lender or trade creditor to that of a shareholder. In Poland, this mechanism is most commonly used in formal restructuring or bankruptcy proceedings, though it can also be executed outside court in solvent companies through a standard capital increase.

The economic logic is straightforward. A company in financial distress carries debt it cannot service. If creditors convert that debt into equity, the balance sheet is deleveraged, cash flow improves, and the business may return to viability. The creditor, in turn, acquires an ownership stake whose value depends on the company';s future performance. This is a bet on recovery rather than a guaranteed return, and creditors must assess that trade-off carefully before agreeing.

In the Polish context, the swap is particularly relevant because Polish insolvency proceedings - governed primarily by the Restructuring Law of 2016 (Prawo restrukturyzacyjne) and the Bankruptcy Law of 2003 (Prawo upadłościowe) - explicitly contemplate conversion of claims into equity as a restructuring measure. The legislator recognised that liquidation often destroys value and that preserving a going concern serves both creditors and the broader economy.

Polish law provides multiple procedural pathways for executing a debt-to-equity swap, each with different levels of court involvement and creditor protection.

The Restructuring Law of 2016 is the primary instrument. It introduced four restructuring procedures: the arrangement approval procedure (postępowanie o zatwierdzenie układu), the accelerated arrangement procedure (przyspieszone postępowanie układowe), the arrangement procedure (postępowanie układowe), and the remedial procedure (postępowanie sanacyjne). All four allow an arrangement - the Polish equivalent of a restructuring plan - to include a provision converting creditor claims into equity. The arrangement must be voted on by creditors grouped into classes and then approved by the court.

The Bankruptcy Law of 2003 also permits a debt-to-equity swap in the context of a pre-bankruptcy arrangement (układ w upadłości), where a debtor who has already been declared bankrupt proposes an arrangement to creditors instead of proceeding to asset liquidation. This is a less common but legally valid route.

The Commercial Companies Code (Kodeks spółek handlowych) governs the corporate mechanics of the swap. A capital increase by way of a non-cash contribution (aport) - where the contributed asset is the creditor';s claim against the company - must comply with the rules on share issuance, valuation of non-cash contributions, and registration with the National Court Register (Krajowy Rejestr Sądowy, KRS). For a joint-stock company (spółka akcyjna, SA), the rules on authorised capital and pre-emption rights are particularly relevant. For a limited liability company (spółka z ograniczoną odpowiedzialnością, sp. z o.o.), the process is somewhat simpler but still requires a notarial deed amending the articles of association.

A non-obvious requirement is that the claim being converted must be legally valid, undisputed in its existence (or at least provisionally admitted in the proceedings), and capable of being valued. Disputed claims create complications because the valuation of the equity contribution depends on the claim';s face value or agreed value, and a contested claim may not be accepted as a valid aport.

Not every distressed company is a suitable candidate for a debt-to-equity swap. The mechanism works best in specific circumstances, and choosing the wrong procedural vehicle is a common mistake.

Scenario one: a manufacturing company with viable operations but excessive leverage. A Polish manufacturer has taken on substantial bank debt to finance expansion. Revenue is stable, but debt service consumes most of the cash flow. The company is not yet insolvent but is heading toward insolvency. In this situation, the accelerated arrangement procedure is appropriate. The debtor files with the court, a restructuring advisor (doradca restrukturyzacyjny) is appointed, and the arrangement proposal - including a debt-to-equity conversion for the main bank creditors - is submitted to a creditor vote. If the required majority approves, the court confirms the arrangement. The company deleverages, the banks become shareholders, and operations continue without interruption.

Scenario two: a retail chain that has already been declared bankrupt. A Polish retailer has been declared bankrupt (upadłość). The bankruptcy administrator (syndyk) assesses the business and concludes that a going-concern sale or arrangement would yield more for creditors than piecemeal liquidation. The administrator proposes an arrangement under the Bankruptcy Law that includes converting the claims of the largest creditors into equity in a newly restructured entity or in the existing company. This is procedurally more complex and requires court approval at multiple stages, but it is legally available and has been used in practice.

The swap is generally not appropriate where the company';s core business model is broken, where the asset base is insufficient to support any equity value, or where creditor relationships are so adversarial that agreement on conversion terms is unrealistic. In those cases, liquidation or an asset sale is usually the more efficient outcome.

A common mistake made by foreign creditors unfamiliar with Polish proceedings is to assume that a debt-to-equity swap can be imposed on minority creditors without their consent. Under Polish restructuring law, the arrangement binds all creditors in a class once the required voting majority is achieved - typically a majority by number and two-thirds by value of claims in each class - but the class structure itself must be designed carefully. Creditors who are converted to equity are placed in a separate class from those receiving cash payments, and the arrangement must treat each class in a manner that is at least as favourable as what they would receive in liquidation.

The procedural path from distress to completed swap involves several distinct stages, each with its own timeline and requirements.

Opening the restructuring proceedings. The debtor files a petition with the competent district court (sąd rejonowy) in the commercial division. The petition must include a preliminary restructuring plan, a list of creditors, and evidence that the debtor meets the eligibility criteria - meaning it is insolvent or threatened with insolvency. The court typically issues a decision within one to two weeks for the accelerated procedure and within several weeks for the standard arrangement or remedial procedure. Upon opening, an automatic stay on enforcement actions applies, protecting the debtor';s assets during negotiations.

Appointment of a restructuring advisor. The court appoints a licensed restructuring advisor (doradca restrukturyzacyjny), who supervises the process, prepares or reviews the arrangement proposal, and ensures that creditor rights are respected. In the remedial procedure, the advisor takes over management of the company entirely. The advisor';s fees are a cost of the proceedings and are paid from the debtor';s estate.

Preparation and submission of the arrangement proposal. The arrangement proposal (propozycje układowe) must specify the terms of the debt-to-equity conversion: which claims are being converted, at what ratio, what class of shares will be issued, and what rights those shares will carry. The valuation of the claims and the resulting equity stake must be commercially defensible. In practice, an independent valuation of the company is often commissioned to support the conversion ratio. The proposal is submitted to the court and then distributed to creditors.

Creditor vote. Creditors vote on the arrangement at a creditors'; meeting (zgromadzenie wierzycieli) or, in the arrangement approval procedure, by correspondence. The required majority is a majority by number of voting creditors and at least two-thirds of the total value of claims held by voting creditors. If the arrangement includes multiple classes, the majority must be achieved within each class. Creditors who are being converted to equity must vote as a separate class.

Court approval. After a successful vote, the court reviews the arrangement for legality and confirms it by order. The court will refuse confirmation if the arrangement violates mandatory provisions of law, discriminates improperly between creditors, or is clearly not in the creditors'; collective interest. The confirmation order is subject to appeal, which can delay implementation by several weeks to a few months.

Corporate implementation. Once the arrangement is confirmed and the appeal period has passed (or any appeal has been resolved), the corporate mechanics are executed. For a sp. z o.o., this means amending the articles of association by notarial deed, issuing new shares to the converting creditors, and registering the capital increase with the KRS. For an SA, the process involves a resolution of the general meeting (or the management board if acting under authorised capital), issuance of new shares, and KRS registration. The KRS registration typically takes two to four weeks under standard procedure, though expedited registration is available in some cases.

Post-implementation governance. Once the creditors become shareholders, the company';s governance structure changes. Former creditors now have voting rights, dividend entitlements, and fiduciary duties as shareholders. Shareholders'; agreements are commonly negotiated alongside the arrangement to govern exit rights, board representation, and future financing. Many underestimate the importance of this governance layer - failing to agree on shareholder rights before the swap is completed can lead to deadlock and further distress.

If you are navigating a complex restructuring or evaluating a debt-to-equity swap as a creditor or debtor, contact info@vlolawfirm.com. We can help structure the setup correctly the first time.

The tax treatment of a debt-to-equity swap in Poland is nuanced and has been the subject of legislative changes and administrative guidance in recent years.

For the debtor company. When a creditor converts a claim into equity, the debtor';s liability is extinguished. Under Polish corporate income tax law (ustawa o podatku dochodowym od osób prawnych, CIT), the extinguishment of a liability in exchange for shares is generally not treated as taxable income for the debtor, provided the transaction is structured as a capital contribution (aport) rather than as a debt forgiveness. This distinction is critical. If the swap is documented as a forgiveness of debt (umorzenie długu), the forgiven amount may constitute taxable income for the debtor. Proper legal structuring of the transaction documents is therefore essential.

For the creditor. The creditor contributes a claim as a non-cash contribution and receives shares in return. The tax basis of those shares is generally equal to the value of the claim contributed. If the shares are later sold at a gain, the gain is taxable. If the shares are sold at a loss - which is common in distressed situations - the loss may be deductible, subject to the general rules on capital losses under Polish CIT. For foreign creditors, the tax treatment in their home jurisdiction must also be considered, and double taxation treaty provisions may apply.

VAT considerations. The contribution of a monetary claim as an aport is generally outside the scope of Polish VAT, as it does not constitute a supply of goods or services. However, if the claim arises from a transaction that was subject to VAT, the VAT treatment of the original transaction remains unaffected by the swap.

Accounting treatment. Under Polish accounting law (ustawa o rachunkowości) and for companies applying IFRS, the swap requires careful accounting entries. The debtor derecognises the liability and recognises an increase in equity. The creditor derecognises the receivable and recognises the investment in shares at fair value, with any difference between the carrying value of the claim and the fair value of the shares recognised in profit or loss. In distressed situations, the fair value of the shares received is often significantly lower than the face value of the claim, resulting in a loss for the creditor.

A common mistake is to treat the tax and accounting analysis as secondary to the legal and commercial negotiation. In practice, the tax consequences can materially affect the economics of the swap for both parties and should be modelled before the arrangement proposal is finalised.

Beyond the formal legal framework, several practical factors determine whether a debt-to-equity swap delivers the intended result.

Valuation disputes. The conversion ratio - how much equity a creditor receives per unit of debt converted - depends on the valuation of the company. In distressed situations, valuations are inherently uncertain and often contested. Creditors who believe the company is worth more will demand a higher equity stake; the debtor and existing shareholders will argue for a lower dilution. Engaging an independent financial advisor early in the process helps establish a credible valuation baseline and reduces the risk of the arrangement being challenged.

Pre-emption rights of existing shareholders. Under the Commercial Companies Code, existing shareholders of a sp. z o.o. have pre-emption rights over new shares unless those rights are excluded by the articles of association or by a shareholders'; resolution. In an SA, pre-emption rights apply to new share issuances unless excluded. In a restructuring context, the arrangement proposal must address pre-emption rights explicitly. If existing shareholders refuse to waive their rights, the swap may be blocked at the corporate level even after the arrangement is confirmed by the court. Restructuring law provides mechanisms to override this in certain circumstances, but the interaction between restructuring law and company law requires careful navigation.

Minority creditor protection. Creditors who vote against the arrangement but are bound by the majority vote have the right to challenge the arrangement in court if they can demonstrate that it treats them less favourably than they would be treated in liquidation. This is the so-called "best interest of creditors" test. Debtors and their advisors must ensure that the arrangement, including the debt-to-equity component, passes this test for each creditor class.

Secured creditors. Creditors holding security over the debtor';s assets - such as mortgages, pledges, or registered pledges (zastaw rejestrowy) - have a stronger negotiating position because they can enforce their security outside the arrangement if they are not included in a class that votes in favour. Including secured creditors in a debt-to-equity swap requires their active consent or a carefully designed class structure that gives them a credible alternative.

Post-swap exit planning. Creditors who become shareholders through a swap typically do not intend to remain long-term investors. Exit options in Poland include a secondary sale of shares to a strategic buyer, a buy-back by the original shareholders once the company recovers, or, for larger companies, a public offering. The liquidity of the resulting equity stake depends heavily on the size and sector of the company. For small and medium-sized enterprises, the shares may be illiquid for several years, which affects the economic value of the swap from the creditor';s perspective.

In practice, founders and creditors should consider engaging restructuring counsel at the earliest sign of financial distress, well before formal proceedings are necessary. Early engagement preserves more options and allows for out-of-court solutions that are faster and less costly than formal proceedings.

What happens if a creditor refuses to participate in the debt-to-equity swap?

Under Polish restructuring law, an arrangement that includes a debt-to-equity swap binds all creditors in the relevant class once the required voting majority is achieved, regardless of how individual creditors voted. A dissenting creditor cannot simply opt out of the conversion if they are in a class that voted in favour. However, a dissenting creditor can challenge the arrangement before the court if they can demonstrate that the arrangement treats them less favourably than they would be treated in liquidation proceedings. The court will assess this claim and may refuse to confirm the arrangement or modify its terms. In practice, creditors with strong security positions have the most leverage to negotiate separate treatment or to resist inclusion in a converting class.

How long does a debt-to-equity swap take to complete in Poland, and what does it cost?

The timeline depends on the procedural vehicle chosen. An accelerated arrangement procedure can be completed in as little as three to four months from filing to court confirmation, while a standard arrangement or remedial procedure typically takes six to twelve months or longer. Corporate implementation - including notarial deeds and KRS registration - adds a further four to eight weeks. Professional fees for restructuring advisors, legal counsel, and financial advisors represent the main cost driver and vary significantly with the complexity of the case and the number of creditors involved. State court fees are relatively modest in comparison. Foreign creditors should also budget for the cost of local Polish counsel, as the proceedings are conducted in Polish and require familiarity with local procedural rules.

Can a debt-to-equity swap be executed outside formal insolvency proceedings in Poland?

Yes. A solvent company can execute a debt-to-equity swap as a straightforward capital increase by way of a non-cash contribution under the Commercial Companies Code, without any court involvement beyond the standard KRS registration. This requires the unanimous agreement of the creditor and the company, a shareholders'; resolution approving the capital increase and excluding pre-emption rights, a notarial deed amending the articles of association, and KRS registration. This out-of-court route is faster and less expensive than formal proceedings, but it requires full voluntary agreement from all parties. It is most suitable where the company is not yet insolvent, the creditor is a single lender or a small group, and the commercial relationship is cooperative. Where multiple creditors are involved or the company is already insolvent, formal proceedings are generally necessary to bind dissenting creditors and to benefit from the automatic stay on enforcement.

A debt-to-equity swap in Poland is a powerful restructuring tool when used in the right circumstances and executed with precision. Polish law provides a coherent framework through the Restructuring Law and the Commercial Companies Code, but the interaction between insolvency procedure, corporate law, and tax rules creates complexity that rewards careful preparation. Both creditors and debtors benefit from engaging experienced advisors early, modelling the economic consequences of conversion, and designing the arrangement to withstand legal challenge.

VLO Law Firms advises international clients on bankruptcy and restructuring matters in Poland. We can assist with structuring debt-to-equity swaps, preparing arrangement proposals, advising creditors on their rights in Polish proceedings, and managing the corporate implementation of conversions. To request a consultation, contact: info@vlolawfirm.com